Major Legal and Ethical Issues Facing International Businesses Today - Literature review Example

Major Legal and Ethical Issues Facing International Businesses Today Name: University: Course Title: Instructor: Date: 1.0 Introduction There are various legal ethical issues facing the business world today. One of these is the corporate governance. Corporate governance and business ethics has gained prominence over the years. Indeed, it has created enthusiasm among media, regulators, practitioners and academics. The letdowns in corporate governance have resulted in massive bankruptcies as a result of managerial frauds, shear negligence and loss of shareholder’s wealth (Baker and Powell, 2009, p. 83&84). For instance, in 2001 through 2002, the corporate world experience numerous scandals associated with unethical practices and non adherence to legal requirements across the globe. These include the Enron scandal and World Com in USA, One Tel and HIH Insurance in Australia and Parmalat in Italy translated into massive losses to the investors and reduced public trust (Jackling et al., 2007, p. 928 & 929). The aim of this paper is to identify and discuss major legal and ethical issues facing international businesses in the world today. 2.0 Legal and Ethical Issues Before we indulge deep into various legal and ethical issues facing the Multinational Corporation today, it is prudent to examine the difference between the two concepts, similarities and the thin line that exists between the two. Unethical issues are actions that violate social norms and have a wide spread disapproval from the majority of the population (Henry and Lanier, 2001, p.217). Legal issues on the other hand relates to crime. Crime is any action that contravenes formal rules/ laws of a country or local authority (Andersen and Taylor, 2011, p. 175). There is a thin line between the two concepts since some unethical behavior is criminal in nature (Cardy & Selvarajan, 2005, p.53. For a business to operate within the precincts of legal abeyance and ethical adherence, it must not only meet the needs of various shareholders and stakeholder, it must effectively balance them. The ultimate goal of business shareholders is to earn revenue from their business. This means at all cost the business has to make profit by creating value to the end customers and locking them in. On the other hand, the ultimate aim of customers to satisfy their needs by buying goods or services that create value for them. The host community aim is to have a responsible business that has a good reputation in terms of employment policy, diversity and environmental conservation among others. The other is the employees. Their role is to provide manpower that enables companies to create value. In return they expect to be rewarded by the firm. This reward can only come when organizations make profits. Apart from the reward, employees expect to work in an environment that is safe, healthy & free from discrimination and offers opportunity for development. The government aim is to offer a level playing field by ensuring that businesses comply with legal provisions (Iamandi, 2007, p. 5). This paper uses the concept of corporate governance to contextualise the discussion about legal and ethical issues for multinational corporations (MNCs). Baker and Powell (2009, p. 84) define corporate governance as “ a set of process, customs, policies, laws and institutions that affect the way a corporation is directed, administered or controlled”. The concept entails internal and external mechanisms of ensuring that management as an agent runs the institution as per the requirement of shareholders and stakeholders. EU (2011, p. 7) conceptualizes ethical as involving “human rights, labor and employment practices (such as training, diversity, gender equality and employee health and well-being), environmental issues (such as biodiversity, climate change, resource efficiency, life-cycle assessment and pollution prevention), and combating bribery and corruption. Community involvement and development, the integration of disabled persons, and consumer interests, including privacy, are also part of the CSR agenda and the promotion of social and environmental responsibility through the supply-chain”. 2.1 Corporate Governance: Non disclosure/ earnings management Liew (2008, p. 456) notes that some MNCs have been characterized by “ineffective boards of directors, weak internal control, unreliable financial reporting, lack of adequate disclosure, lax enforcement to ensure compliance, and poor audits. These problems are evidenced by unreported losses and understated liabilities”. One of the major ethical and legal issue affecting MNCs in the world today is a non disclosure/ earnings management. Various MNC have engaged in dishonest conducts that does not meet the legal requirements and ethical standings. These include the Enron scandal and World Com in USA, One Tel and HIH Insurance in Australia and Parmalat in Italy (Jackling et al., 2007, p. 928 & 929), in the UK, Michael Bright the CEO of Independent Insurance was found guilty of conspiring to defraud. Others include Conrad Black who was sentenced for fraudulent programmes (Holmes, 2008, p.249). Scott, (1998, p. 276); Iqbal & Strong (2010, p. 168 & 169) observed that earning management is a common occurrence in business practice. Managers have been pushed to partially manage earnings by maximizing their utilities at the expense of other stakeholders. It involves utilizing accounting loopholes in financial reporting and transaction by altering the report unduly to mislead some stakeholders about the firm’s economic performance (Watts & Zimmerman, 1990, p. 133) the misleads include: analysts’ forecasts, management’s prior estimates, or the continuation of some earning trends. Earning management is just one of the facets of accounts manipulation that also involves: income smoothing, big bath accounting, creative accounting and window dressing. Enron corporation had been listed by Fortune magazine as one of the ‘America’s most innovative company’. From 1996 to 2000, it was one of the leading electricity, natural gas and communications companies in the world, when it declared revenues of $111 billion. With shocking speed, the company came crashing down. Enron filed for bankruptcy on December 2, 2001 when it was revealed that its financial position was generated by accounting fraud. The company’s stock price quickly dropped from 90 dollars to 30 cents on the dollar sending shock waves throughout the investing community. Enron’s stock had been able to thrive for years because the company’s financial statements did not include debts and losses that were incurred by special purpose entities or SPEs which it controlled (Petra and Loukatos, 2009). The drive mainly arises out of the need to depict a healthy financial position that is able to transfer wealth between various stakeholders. The stakeholders here are the company and the society (political costs) fund providers (cost of capital) or managers (compensation plans). The potential targets of earnings manipulation include: earnings per share (EPS) and the debt/equity ratio. In the initial two instances, the company benefits while in the third case. The managers are acting against the firm. Accounting manager can alter earning per share through adding or removing certain revenues or expenses/ modification of net income. Secondly, by presenting an item before or after the profit used to formulate the earnings per share/classificatory manipulation. In addition to the above, in some countries where full dilution is not compulsory, the denominator can also be exploited by applying unrealistic assumptions that are very difficult to challenge (Stolowy & Breton, 2003). 2.2 Corporate Governance: Corporate social Responsibility Issues Over the years there has emerged a school of thought that stresses the need for business to pursue a new role of making the society a better place. These people are calling for a paradigm shift on how businesses are conducted from the opaque manner to transparent entities (Chang, 2008, p.82). The question then is what social expectations should be business be subjected to so that they maintain responsibility towards the society they operate in (p. 82 & 83). The answer lies with corporate social responsibilities (Benabou & Tirole, 2010, p. 1). However, companies have committed goofs in relation to corporate social responsibilities (CSR). In addition, they are town on what path to follow in certain circumstances. Moreover, companies have been accused of playing major role in fanning conflicts in certain regions so as to exploit the legal political vacuum for their own benefit. Globally, there is the realization that firms can not only base their performance on profits recouped alone (Geraghty, 2010, p. 141). In normative perspective, it is the government that is supposed to regulate the failures associated with pure economic approaches. However, there has been greater recognized that this can’t be left to the government alone. Business have an equal task of addressing the same (Pigou, 1920 cited in Benabou & Tirole, 2010, p. 1). Good faith concept requires that one act honestly and fairly in meeting their obligation (Zeller, 2003, p. 4). Corporate social responsibility (CSR) forms a level of appreciation of business organizations for being given the opportunity by the host community to conduct business amongst them by drawing resources from their community. Carroll (1991, p. 40) notes that factors like sustainable development, occupational health & safety, consumer safety and equal employment opportunities have given rise to CSR. One example of the dilemma in ethical issues is related to the Democratic Republic of Congo (DRC) situation. For instance, the question that Prosanky (2007) asks is whether to label a company that has invested in the war region unethical or not. To contextualise his concern, he captures the extreme view of two interested stakeholders. The first is the investing company and the second is the local resident who has suffered from severe war which is associated with gold mining. He notes the following. “We mine gold. We sell gold. That’s what we do.” - Steve Lenahan, Executive Officer for Corporate Affairs, AngloGold Ashanti “We are cursed because of our gold. All we do is suffer. There is no benefit to us.” - Congolese gold miner (Prosanky, 2007, p. 236) The concern is, should businesses operate in conflict zones or avoid it totally. Perhaps, how do they align themselves in extreme situations like this (Prosanky, 2007, p. 238)? 2.3 International Ethical Standards v Domestic Considerations From the above observation, it would be prudent to argue that a company should evaluate the environment it is operating in. According to me, the solution would be for companies to use international standards as the guiding principle. However, these approaches should be tailor made according to local needs of the host country. The rationale behind this is based on the fact that different countries face different problems and have different expectations. For instance, Africa is viewed as high risk and adherence to legal provisions is low (Okeahalam, 2004, p. 360). 3.0 Conclusion The aim of the paper was to examine major legal and ethical issues facing international business. The paper identified two critical issues. The first relates to accounts manipulation which has resulted in losses and reduced investor confidence. This has manifested itself in countries like USA, UK, Australia and Italy. The next issue revolved around corporate social responsibilities. In this perspective, the companies are strained on what to follow. Moreover, some companies have been blamed for the suffering of the public in a bid to meet their objectives. 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